Pimco’s Gross: Wait For More Attractive Opportunities

By Michael Aneiro

As a follow-up to his pointed commentary earlier this month about the harmful consequences of Federal Reserve policy, Bill Gross, manager of the Pimco Total Return Fund (PTTRX), is out with a brief Q&A-style primer on bond investing at the end of a three-decade bond bull market. Policy-wise, with all eyes on the Fed this week, Gross says “we may see some tapering, possibly by the end of the year,” while the Fed still tries to avoiding the “disastrous” mistake of tightening policy too early as it did in the 1930s. Here’s some take-away for bond investors:

While it’s natural to want to reach for higher returns, an investment strategy’s success depends on carefully weighing potential rewards against the long-term costs…. Today, given the economic uncertainty and rich market valuations, we think that the fortitude to wait for more attractive opportunities is a valuable attribute…. [A]mong other things, we’re avoiding long durations, reducing credit risk away from economically vulnerable companies and sectors, managing volatility and increasing exposure to countries with higher-quality balance sheets such as the U.S., Brazil, Mexico and Australia. And we are seeking out and taking advantage of opportunities in the market. For example, we believe intermediate Treasuries are currently attractively priced at around 2%….

It’s important for investors to remember the reasons they own bonds in the first place – namely for the potential for the preservation of capital, income and growth, relative steadiness and typically low to negative correlations with equities. These needs – which will only become more urgent as millions of baby boomers head to retirement over the next decade and a half – are long term, regardless of what markets are doing today. So fixed income should always have a place in a portfolio. Still, there are ways to navigate challenging markets without feeling stuck. One is to expand your investment universe by going global…. Finally, be patient.